Catherine Chan - Investor Relations Pony Ma - Chairman and Chief Executive Officer Martin Lau - President James Mitchell - Chief Strategy Officer John Lo - Chief Financial Officer

Eddie Leung - Merrill Lynch Wendy Huang - Macquarie Erica Werkun - UBS Alan Hellawell - Deutsche Bank Dick Wei - Credit Suisse Cynthia Meng - Jefferies Alicia Yap - Barclays Thomas Chong - Citigroup

Ladies and gentlemen, thank you for standing by and welcome to the Tencent Holdings Limited 2015 Third Quarter Results Announcement Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Miss Catherine Chan from Tencent. Please go ahead, Miss Chan.

Thank you, operator. Good evening. Welcome to the third quarter results conference call of - third quarter 2015 results conference call. I'm Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and our non-GAAP measures, please refer to our disclosure documents downloadable at www.tencent.com/ir. Now, let me introduce the management team on the call tonight. We have our Chairman and CEO, Pony Ma; President, Mr. Martin Lau; Chief Strategy Officer, Mr. James Mitchell; and Chief Financial Officer, Mr. John Lo. Pony will kick off with a short overview, Martin will speak to strategy, James will review our business, and John will review our business, and John will go through the financials before we take your questions. I'll turn the call over to Pony now.

Thank you, Catherine. Good evening. Thank you for joining us. During the third quarter of 2015, we delivered a solid growth in our core platforms for social, games, news, video and payments. Financially, our mobile games business [indiscernible] the implementation of the new strategy that extend our products range. Our online advertising revenue doubled year-on-year, benefiting from growing mobile contributions in our partner media platforms and our unique social performance advertising. We also saw a sharp increase in mobile payment usage. In addition to commercial success, we also seek to leverage our platform to create positive social impact. On September 9, we launched a one of its kind Internet Plus donation campaign. The [indiscernible] creates widespread [indiscernible] among our partners and community at large. Let me highlight a few numbers for you. John will provide you the details in the financial section. Total revenue, excluding eComm transactions, grew 37% year-on-year to RMB 26.5 billion. Sequentially, it rose 14%. Non-GAAP operating profit was RMB 10.5 billion, up 27% year-on-year and 2% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB 8.3 billion, up 26% year-on-year and 4% quarter-on-quarter. Moving on to platform updates, our social communication products, QQ and Weixin further deepen it's engagement with a wide spectrum of Internet users in China. QQ is the most popular social platform for young entertainment-driven users. Total MAU reached 860 million in the third quarter. Within which smart devices MAU increased 18% year-on-year to 639 million. Weixin is the faster-growing mobile-only social platform that was able to convert users who had not used instant messaging before. Combined MAU of Weixin and WeChat rose 39% year-on-year to 650 million. Qzone, our social sharing platform integrated to QQ grew total MAU to 653 million, within which smart devices, MAU rose 14% year-on-year to 577 million. For online games, we've deepened it's penetration in multiple zones in PC and mobile, reenforcing our leadership as the largest operator and publishing platform in China. And now, our online media platforms, our mobile news service continue to grow due to better content duration and improved customization. Total video views increased robustly, both within the mobile apps and within Weixin official accounts. In mobile utilities, YingYongBao as well became the most popular third-party app store in China. In our mobile security and mobile browser are also a market leader in the active categories. With that, I will pass to Martin.

Thank you, Pony. Good evening and good morning to everybody. Since there has been many news flows in the online-to-offline, O2O space, and we have also made quite a number of significant investment in best-of-breed O2O companies. We feel that it's important to provide you with more information around our O2O strategy. First of all, we do believe that the O2O space is very important to Tencent. Why? Firstly, it's a way for us to capture business opportunities when various industries move part of their business processes from offline to online as part of the bigger Internet Plus movement in China. Our highly engaging social apps, Weixin and QQ, can connect users to a broadening spectrum of vertical services. This unlocks business opportunities for partners in that O2O ecosystem. And at the same time, provides our users with better user experience. Secondly, O2O activities can grow Weixin Pay and QQ Wallet user base, as well as develop payment habit among our users. Thirdly, we can also source new advertisers for our performance-based advertising platform via our O2O partners as we look into the future. Now, why do we choose to partner with best-of-breed companies as opposed to doing it ourselves? The most important reason is that O2O businesses require significant domain expertise, as well as significant offline execution capabilities. These are not particularly the strongest suite of a technology- and product-focused company like us. By partnering, we can actually leverage the skills owned by the best in class management in the entire market. In addition, we can also increase our capital efficiency by investing in multiple companies and multiple category leaders and achieved best overall consumer experience. Now as to the future of O2O companies, we believe that while many of them are still in investment mode in the near term, but over time, we believe that our investment in these leading O2O companies would generate significant value as these companies gain better efficiency in business processes as well as achieve economies of scale when their businesses continue to grow rapidly. In addition to that, we believe the O2O activities also helps you deepen a mobile payment habit with - among our users. Our mobile payment solutions, Weixin Pay and QQ Wallet, have grown rapidly to produce a synergistic relationship with our O2O ecosystem. They're now more than 200 million users with bank cards bound to Weixin Pay and QQ Wallet. This impressive growth was initially driven by C2C transactions among users such as red envelope gifting and money transfer. And now, it is increasingly expanding to commercial payments such as O2O activities, utilities payments, as well as eCommerce. Weixin Pay and QQ Wallets are very important building blocks in our overall ecosystem. We're doing a number of things to grow user adoption and deepen payment habit among our users. Firstly, we invest in technologies to upgrade our product, as well as to enhance the security protection for our users. Secondly, our key O2O partners such as Didi Kuadi, Meituan-Dianping and 58.com generate millions of transactions per day. By integrating Weixin Pay and QQ Wallet to their platforms will leverage these high-frequency payments scenarios to deepen user's habit of using our mobile gaming solutions and at the same time will also drive traffic through our important O2O partners. Thirdly, we encourage repeated usage of the users by subsidizing the bulk of the bank handling charges to the users. Although we are now incurring significant costs as a result, we believe that these subsidies are worthy investments for the future. As our mobile payment solutions continue to gain traction, our ecosystem can be more useful to our partners where consumers can find what they need, interact with merchants and complete transactions in a seamless manner. Now, with that, I'll pass to James to talk about the business review.

Thank you, Martin. In the third quarter of 2015, our total revenue increased 34% year-on-year, and that's excluding eCommerce transactions grew 37% year-on-year. VAS represented 77% of our revenue within which games contributed 54% and social networks 23%. Online advertising represented 19% of our revenue, up 7 percentage points year-on-year. For value added services, segment revenue was RMB 20.5 billion, up 28% year-on-year and up 12% quarter-on-quarter. Social networks revenue was RMB 6.2 billion, up 32% year-on-year and up 14% quarter-over-quarter. Our Super VIP privilege subscription service, premium content subscriptions and item sales drove the growth. Online games revenue was RMB 14.3 billion, up 27% year-on-year and up 11% quarter-on-quarter. New smartphone games and the strong performance of advanced casual games delivered the year-on-year growth while new smartphone games and positive seasonality contributed to the quarter-on-quarter increase. Looking at social networks starting with Mobile QQ enrich functionalities with specific types of QQ groups such as projects assignments for students and friend finding for nearby groups. We introduce celebrity-themed fun stickers and chat levels to make messaging with friends more fun and more engaging. With our QQ Wallet products, we are leveraging red envelope gifting to drive growth in QQ Wallet adoption. For Weixin, we upgraded voice and video technologies to support nine-party video conferencing. We added group chat management features such as a publishing tool for group announcements. And for Weixin Pay, we've seen very rapid growth in consumer-to-consumer transactions over the last two years. More recently, Weixin Pay has started to experience a surge in money transfer, eCommerce and O2O transactions. Looking at our PC client games, average concurrent users for our advanced casual games grew 14% year-on-year to 8.7 million, reflecting deeper engagement within our key genres. Average concurrent users for massively multiplayer games were flat year-on-year, stabilizing after several quarters of declines. Within the major game genres, for battle arena games, League of Legends sustained a healthy total user growth and expanded its paying user base with new limited edition schemes. Within our shooting games, we organized several e-sports event such as the National Finals Crossfire and city matches for [indiscernible]. For our sports games, we're looking for new users with co-marketing activities such as cross-promoting FIFA Online 3 with a new reality TV show and cross-promoting our NBA 2K online basketball game with specialized programming on our video platform. And for massively multiplayer games, we put two new games, Moonlight Blade and ArcheAge into large-scale open beta testing in the third quarter and these contributed to the sequential uptick in average concurrent users. For smartphone games during the third quarter we began implementing new developments and publishing strategies, specific types of gaming experiences. For example, the content-driven games such role-playing games which generate most of the mobile game industry's revenue today, we're launching titles based on proven IPs since [indiscernible] existing fan communities. For example, our new RPG in battle card games, Legend of MIR 2 and King of Fighters '98 ranks within the top five revenue grossing games in China in September. The gameplay-driven titles such as shooting and action games, which we expect to become increasingly important in the future, were building on our PC experiences to launch innovative titles that should define and popularize their genres. For example, our shooting and battle arena games, we find mobile are leaders in their emerging categories. And for platform-driven titles such as board and playing card games which generate lower ARPU but high daily active usage were leveraging ratio in Q2 to drive activity into our titles and maximize that social impact. For example, our playing card puzzle and mahjong games each have millions or tens of millions of daily active users. While it's still early days for these new strategies, the initial results are quite encouraging. We generated RMB 5.3 billion to smartphone [indiscernible] revenue in the third quarter, up 60% year-on-year on a gross-to-gross basis, and up 18% quarter-on-quarter. Out of the 12 new titles we launched in the quarter, eight were mid-core. And according to [indiscernible], we operated 5 of the top 10 grossing titles in China during the third quarter of the year. Moving on to online advertising, segment revenue doubled year-on-year to RMB 4.9 billion and rose 21% quarter-on-quarter. Our brand advertising revenue was RMB 2.5 billion, up 67% year-on-year and 27% quarter-on-quarter. More traffic in our video and news apps drove the year-on-year growth. The Voice of China 4 program and monetization of our news app contributed to the sequential growth. Performance advertising revenue was RMB 2.4 billion, up 160% year-on-year and up 16% quarter-on-quarter. Mobile inventory, fill rates and pricing all contributed to the year-on-year growth. Revenue grew sequentially due to high [indiscernible] rates of CPCs on our Weixin Official Account ads and more impressions in our mobile ad network. Taking a closer look at our media brand advertising, we gained some market share across our top five advertiser categories namely food and beverage, automobile, personal care, online services and consumer electronics. In video, if we add together the video views within our Tencent video app and the video views inside Weixin Official Accounts, we enjoy increasingly clear mobile traffic leadership. Compared with the same quarter a year ago, our average daily video views within our video app almost doubled and our average daily video views within Weixin Official Accounts quadrupled. Consequently, our mobile advertising inventory more than doubled year-on-year resulting in our video advertising revenue in total almost doubling year-on-year. We continue investing in high-quality content, licensing live sports broadcast and movies, as well as online drama series. In news, the improved mobile sell-through rates and revenue are shifting to selling more [indiscernible] ads on a CPM basis. For social performance advertising, we continue to carefully control ad loads but grew revenue rapidly nonetheless by enhancing our targeting capabilities and broadening our advertiser client base. Looking at some of our major social ad inventories, Qzone CPC increased year-on-year due to more bidders and better targeting. Weixin Official Accounts' ad impressions more than tripled year-on-year. Weixin Moments' ad campaigns increased quarter-on-quarter as we lowered the minimum ad spend threshold to RMB 200,000 per city and added new verticals such as travel and real estate advertisers. And finally our mobile ad network traffic partners [indiscernible] volumes grew significantly year-on-year from a low base. And I'll now pass on to John to walk through the financials.

Thank you, James. Hello, everyone. For the third quarter of 2015, our total revenue was RMB 26.6 billion, up 34% year-on-year or 14% quarter-on-quarter. Gross profit was RMB 15.6 billion, up 23% year-on-year or 8% quarter-on-quarter. Other gains of RMB 614 million in the third quarter primarily reflected disposal and [indiscernible] disposal gains arising from 58.com and other investee companies, which was partly offset by impairment provisions for certain investee companies. Operating profit was RMB 10.3 billion, up 37% year-on-year or 3% quarter-on-quarter. Net finance cost of RMB 481 million in the third quarter mainly reflected interest expense on debt balance in the third quarter as well as foreign exchange losses of about RMB 108 million, mainly arising from renminbi depreciation. The increase in share of losses associated in joint ventures mainly reflected additional loss related to one-off non-GAAP expenses incurred by associates. Income tax expenses were RMB 1.6 billion, up 13% year-on-year or down 15% quarter-on-quarter. Effective tax rate for the quarter was 17%. Net profit attributable to shareholders was RMB 7.4 billion, up 32% year-on-year or 2% quarter-on-quarter. Looking at non-GAAP, operating profit for the quarter was RMB 10.5 billion, up 27% year-on-year or 2% quarter-on-quarter. Net profit attributable to shareholders was RMB 8.3 billion, up 26% year-on-year, or 4% quarter-on-quarter. Diluted EPS was RMB 0.881 for the quarter. Turning to segment gross margin, gross margin for value-added services was 64%, roughly flat year-on-year on a gross-to-gross basis and down 2 percentage points quarter-on-quarter. Sequential dividend gross margins really resulted from a mix shift towards lower margin third-party platform games revenue and higher channel costs in the third quarter. Gross margin for online advertising was 49%, down 3 percentage points year-on-year and quarter-on-quarter. The lower gross margin mainly fueled from higher video content costs. Moving to operating expenses, selling and marketing expense was RMB 2 billion, up 7% year-on-year or 28% quarter-on-quarter. The year-on-year increase was a result of [indiscernible] costs and advertising spending which was partly offset by reduced marketing expenses for WeChat. The sequential jump was mainly driven by recent advertising spending to promote key products such as online games, online media and mobile utilities; several which are seasonal in nature. G&A expense was RMB 4.4 billion RMB, up 16% year-on-year or 9% quarter-on-quarter, of which R&D expense was RMB 2.5 billion, up 21% year-on-year or 19% quarter-on-quarter. G&A expense increased due to increased R&D expenses. As a percentage of quarterly revenue, selling and marketing expense was 8% and G&A was 16%. R&D represented 9% of quarterly revenue and share-based compensation was approximately 3% of quarterly revenue. As at quarter-end, we had just over 30,000 employees, representing a 15% increase year-on-year or 7% quarter-on-quarter. Campus recruitment was the driver behind head count growth sequentially. Looking at margin ratios for the third quarter, gross margin was 58.6%. It was down 3.5 percentage points year-on-year on a gross-to-gross basis and down 3 percentage points quarter-on-quarter. Increased video content cost and bank handling fees and money transfers using our mobile payment solutions drove margins lower year-on-year. Sequentially, the mix shift due to lower margin, third-party smartphone games and increased channel costs from smartphone games were additional factors [indiscernible] the margins. Non-GAAP operating margin was 39.5%. It was down 1.1 percentage points year-on-year on a gross-to-gross basis or down 4.5 percentage points quarter-on-quarter. Lower operating margins year-on-year reflected lower gross margins, partly offset by reduced operating expenses as a proportion of total revenues. The sequential jump mainly results from lower gross margins and higher selling and marketing expense as a proportion of total revenues. Non-GAAP net margin was 31.8%. It was down 0.8 percentage point year-on-year on a gross-to-gross basis or down 2.7 percentage points quarter-on-quarter. The sequential decrease was due to lower operating margin, partly offset by reduced income tax expense as a proportion of total revenues. For the third quarter, total CapEx was RMB 1.7 billion, up 56% year-on-year or down 42% quarter-on-quarter. Operating CapEx was RMB 1.2 billion, up 94% year-on-year or 45% quarter-on-quarter. The increase was primarily for the purchase of service to support business operations. Non-operating CapEx was RMB 498 million, up 7% year-on-year or down 76% quarter-on-quarter. Non-operating CapEx as significantly lower quarter-on-quarter because we had CapEx for land use rights in the second quarter. Free cash flow was RMB 6.6 billion, down 5% year-on-year and up 22% quarter-on-quarter. Free cash flow in the third quarter reflected higher operating cash flow, partly offset by payments for land use rights and services. Our net cash position at quarter-end was RMB 21.2 billion, flat year-on-year and down 2% quarter-on-quarter. Slight sequential decline in net cash mainly reflect the exchange losses on bank borrowings and notes payable denominated in U.S. dollars. Fair market value of our listed associates and available-for-sale financial assets was approximately RMB 73 billion as at quarter-end. This concludes our presentation. Thank you.

Thank you. Operator, we'll [indiscernible] for questions now. And we will take one question and one follow-up in every turn. And we'd actually prefer you all to go back on the queue and do a second time if they have more any more questions. Please, operator, let's take the first question.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.

Hi. Good evening. Thank you for taking my questions. Just wanted to understand how your O2O ecosystem balances your advertising basis? Could you share more color on that front? Any metrics will be helpful. And then just a housekeeping question, I wonder if you mind to share the ARPU of various types of your games? Thank you.

Yeah. In terms of the O2O ecosystem, I think right now, we are still in the process of building the ecosystem. So, there's not a lot of meaningful revenue contributed on the advertising side. But sort of if you take the eCommerce ecosystem as an example or precedent, what we see is as we work with each one of the eCommerce networks, the biggest being was of JD, for example, because JD itself has got an open platform which host a large number of merchants. When we work with JD, we're able to convert a lot of those merchants into advertising clients on our platform. And effectively, JD's advertising platform would take in the advertising dollars from its own merchants. And then, in order to get additional traffic, it would actually put some of the money in our own performance-based advertising system. And as a result, a lot of the merchants on the JV network become our own advertisers. As we look into the O2O space, the O2O space is a big movement in which there will be platform companies which helps the merchants within particular verticals to become online, right? So, in the case of, for example, in the future, right, we look at the [indiscernible] and we look at H1, when they host a lot of restaurants and when they host a lot of offline services companies, they can actually convert some of the merchants into our advertisers. Likewise, for 58, for example, when they host a number of different advertisement on their platform, be it companies which are trying to hire people, be it [indiscernible] agencies which are trying to sort of promote their services, in the future, when we have this connection to their advertisers, our entire network of performance-based advertising inventories can actually serve them. So, right now, we're still in the process of building these links. But over time, we can actually sort of leverage them to get access to advertisers in different industries that they serve.

In relation to ARPUs, for MMOG, quarterly ARPU ranges from RMB 145 to RMB 455. For advanced casual games, it ranges from RMB 80 to RMB 270. And for smartphone mobile games, we look as a performance as a whole, it will be within RMB 170 to RMB 180 on a quarterly basis.

Thank you. Your next question comes from the line of Wendy Huang from Macquarie. Please ask your questions.

Thank you. My first question is regarding the bank handling fee you mentioned for the C2C money transfers. Was it actually mainly related to the red enveloped issued in the WeChat platform? And I noticed that cost of revenues for others almost doubled to RMB 1.1 billion. So, is this amount actually mostly related to this, the bank handling fee? And second question is regarding your ambition in the travel space. So, currently, you're holding 15% in Tongcheng and 37% in eLong. What's your plan to integrate those travel assets you already invested? Or do you have other plans for the travel space? Thank you.

Okay. In terms of the bank handling fees, what happens is when users transfer money from their bank cards, either debit card or credit card, to our accounts or use Weixin Pay and QQ Wallet to pay merchants, we incur a bank handling charge. And for the part which I related to merchant payments, right, we actually set up new charge to payment and we generate sort of corresponding revenue. But for the consumer-related payments, then we actually sort of incur a cost. And the cost, actually, [indiscernible] is proportional to the amount. And as you look at the two different big components, one is actually our red envelope payment scenario. And the other one is money transfers. It turns out that the red envelope is actually a small amount but sort of new large volume type of payment scenario. Whereas bank - transfers among consumers can have many - much fewer transactions but sort of much higher amount per transaction. So a lot of that bank online charges are actually sort of related to the second part, which is the money transfer rather than the red envelope. So at this point in time, we're still subsidizing a lot of these bank charges. But over time, we'll think about ways to contain the bank charges, especially with respect to the higher amount per transaction type of transactions, so that we don't lose the high frequency transactions. We continue to sort of provide a lot of [indiscernible] users to use the high frequency transactions, which sort of by the way constitute a small part of the overall expense. So that's sort of - our plan going forward.

In relation to the increase of costs in the others, you were right that a big chunk of this is attributable to the bank charges that there are three parts of it as Martin has mentioned before. The first part is in relation to red envelope and the second part is in relation to money transfer, and the third part is in relation to our normal online payment businesses.

Now, in relation to the travel industry, as you have pointed out, we have investments in Tongcheng, and we have the investments in eLong. And we think sort of - each one of the two companies is actually sort of new competent player in the overall market. And they - each one of them actually sort of plays a slightly different role in the overall ecosystem which is actually very big. So, Tongcheng is a player which focuses on scenery spots, and they are also moving into packaged tours, whereas eLong is actually a dedicated hotel player. And we view that since the overall travel market is actually growing in a pretty rapid manner and the entire industry is actually moving online, we believe with the distinctive positioning of the two companies, they actually - each one of them will have a pretty healthy growth going forward.

Thank you. Your next question comes from the line of [indiscernible] from HSBC. Please ask your question.

Hi. Thank you very much for taking my question. I had a just kind of a question. My first question relates to the Wallet. I mean, you're seeing the 200 million users as a very, very impressive number. I was wondering if you can give us a little bit more color in terms of the transaction volume. How much is coming from C2C versus eCommerce, O2O? Maybe you can comment on what kind of market share you might have in mobile payments today. And secondly, I was wondering if you can just kind of comment on how you view the current video landscape especially after Alibaba acquiring Youku. Thank you very much.

What I can say in terms of Weixin Pay and QQ Wallet is that, first of all, we have seen rapid growth in terms of the number of people who have binded their bank cards, that's the first step. Last time, we have provided the number of more than RMB 100 million. And this time around, we have exceeded the RMB 200 million. And a pretty high proportion of these people actually is that active users of the payment solution. And in terms of the payment scenarios, by far, the largest is still C2C and - which include, by far, the largest being the red envelope gifting which is very unique to the Weixin and QQ ecosystem. In addition to that, the transfers has got pretty important volume, and the amount is actually quite big because it's –the transfer per a transaction and its much higher than the red envelope. Followed by that is actually O2O transactions which is that sort of our partners actually generates millions of O2O transactions on a daily basis. And then it's followed by utility payments including people charging up their mobile phone cards, including people paying for different sort of types of utilities, and then eCommerce which constitute a smaller number of transactions but usually higher amounts per transaction. So, the overall volume on eCommerce is actually quite large as well.

In terms of the video industry, as you know, we were not the first mover in video. And so for us, the video industry has always been extremely competitive and generally [indiscernible] always will be somewhat competitive. That said, we think that we've done several things that improve our competitive position and that [indiscernible] to some extent from some of the shorter-term disruptions in the market. For example, we've purchased a large volume of very high-quality content on long-term multi-year contracts such as our NBA basketball rights, our HBO rights, our Paramount rights, our Star Wars rights and our James Bond rights which we just announced yesterday. So, to begin, those are long-term multi-year contracts that don't come up for re-bid every few months. And then more importantly, I think that our position in video is a little bit dissimilar to the rest of the industry and that we have some unique advantages that flow from our platform. One set of advantages is our ability to drive IP across different formats such as from our online literature business or online game business into online video. Another set of advantages that's becoming increasingly apparent is the increasing - is the growing consumption of video content within social networks. And this is something that's happening globally, if you look at the big social networks in the U.S. And we mentioned in the introductory remarks that it's also happening in China where the video views within Weixin official accounts quadrupled this quarter versus the year-ago period.

Okay. Next question, please.

Thank you. Your next question comes from the line of Erica Werkun from UBS. Please ask your questions.

Thank you. If I may, just first a follow-up on James' comments on video. For your overall video business or movie business, how should we think about the roles of Penguin Pictures and also Tencent Pictures? And also, how do you allocate capital among these two divisions and, also, online video? And then, a quick question on Moments advertising. Could you just share - I think last quarter, you shared that you ran about 60 ads. How many ads did you run in the third quarter? And what is the split between the Fortune 500 brands and the SME? Thank you.

Certainly. So, on the video front, we allocate capital based on expected return, but also on the broader sort of halo impact around the platform both in the eyes of users and advertisers which means that we often focus disproportionately on very highly-grounded, high-value content in the eyes of both users and advertisers. With regards to the two vehicles you specifically mentioned, Tencent Pictures is primarily focused on managing Tencent-sourced IP, particularly game and literature IP, and then, managing that through different windows such as movie, TV series, game and so forth. You may know that as well as having the leading online game platform in China, we also have the leading online literature platform in China. And so, you're probably aware that there's been a recent trend, which we think is a persistent trend, of a popular online novels becoming popular TV series, popular movies, popular games and so forth. And so, Tencent Pictures is our attempt to leverage on and accelerate that trend. Penguin Pictures is a different vehicle which focuses on taking stakes, usually minority stakes, in drama series that are being created, and, therefore, participating in the distribution of IP that's often sourced from outside Tencent. So, although the two are superficially similar, one of them is more focused on the IP and then, managing the IP through multiple windows whereas the other is more focused on tapping into the single video window. So, that's on the video question. With regard to Weixin Moments, we're progressively ramping that product up where we served over 100 advertisements in the third quarter and we continue to expand the number of advertisers, although right now, we are still primarily focused on large-sized advertisers. So, I think in the first half of the year is primarily Fortune 500 advertisers. During the second half of the year, we're enabling more targeting by city. And so, that's opening up some of the more kind of regional or provincial advertisers. But we're still primarily focused on bigger advertisers and we'll kind of democratize that as we move forward.

Okay. Next question, please.

Your next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your questions.

Yeah. Hi. Thank you. Taking in turn Erica's question a bit further. With regards to Weixin, can you give us just a rough sense of what might've been the revenue contribution from Moments in the quarter? And I'm not sure, maybe you mentioned this, how many C2C advertisers do we have currently? And how would we envision that growing maybe over the next year? And then one small other question. What is the current revenue share with Official Account owners? And is that likely to change? Thank you very much.

Sure. So, there's a number of questions. So, I think that with regards to Weixin Moments, we don't disclose the exact breakdown, but within our performance advertising business, some of the bigger contributors include advertising on mobile Qzone, advertising to Weixin Official Accounts, advertising on our mobile ad network, advertising on Weixin Moments, also advertising within our app store and our mobile browsers. So there's a range of different contributors, and Weixin Moments is a meaningful - the biggest line of those numerous advertisers. In terms of the number of advertisers, I think your estimate of the number of advertisers on our performance advertising platform in total. So that would be in the ten thousands. That number is up over 50% year-on-year. And we have some initiatives that we think - may accelerate the growth in number of advertisers going forward, that - we're seeking to develop. In terms of the revenue share with the official account owners - so these are situations where a advertiser buys an ad at the bottom of an official account within Weixin, and then we'll share that advertising revenue with the owner of the official account. We have a sort of sliding scale based on the nature of the content. But the owner of that content might capture roughly half of the advertising revenue, depending on [indiscernible] force in that scale.

Thank you.

Next question, please.

Your next question comes from the line of Dick Wei from Credit Suisse. Please ask your questions.

Hi. Yeah. I got two questions. First question is how should we look at the IVAS growth margin trend going forward. I think there are a couple of dynamics about in-house games, third-party games [indiscernible]. I wonder how should we think about those trends going forward. And then secondly, as the shareholder of Meituan-Dianping, what is currently Tencent thinking about the right strategy for the company growth [indiscernible] in terms of the strategy technology and subsidies? Thank you.

Okay. Well, in terms of [indiscernible] - that's a pretty big basket [indiscernible]. I think there are two components, right? One is obviously the games. And in terms of the games, as you can see, we have actually delivered a pretty consistent growth or those that are slower than before the consistent growth on our PC games and that's actually sort of mainly driven by our main games including most prominently League of Legends. In terms of mobile games, which is sort of the segment that's really gaining traction as overall gaming sector, we have put in a new strategy as we mentioned in our last conference call in that when you think about sort of in the past, right, the key component of our strategy was actually sort of putting our mobile games on our two important social platform. One is Weixin. The other one is QQ. But over time, we started to leverage the two platforms as well as leverage our YingYongBao as well as our browser to push to find more channels and traffic as well as more context to promote games to our users. And then sort of in terms of the content itself, we have actually moved from the casual games into mid-core games, now into more hardcore games. And as you move from these game genres, typically, you will see sort of new fewer players, but sort of new higher ARPU. So, the ability to do a more target advertising is actually important. So, our strategy actually is going to be also involved as identifying pockets of users which may be interested in certain harder-core genres and promoting those genres to these users. And as you can see in our latest MMOG on mobile, it's actually sort of quite successful. We still believe that sort of the mobile game segment has got good growth opportunity. We continue to execute our new strategy to tap into that opportunity. Now with respect to Meituan and Dianping, I think we are very - we are relatively a small shareholder in the company right now. And we feel that sort of the two companies, by merging sort of - has established a very strong presence within the O2O space, both in terms of the restaurants, as well as other lifestyle services, as well as the food delivery part. So, over time, we believe that they would be able to establish stronger economies of scale. They will also be able to not only just do the transactions right, but also, get deeper into the entire value chain so that they can create more value for their merchants, as well as for their consumers. And in our - as mentioned in our O2O strategy section, we believe that our ecosystem can help not only them, but other O2O partners in terms of directing user traffic to them in terms of helping them with the payment scenarios, as well as, going forward, if their network actually connects with our advertising network, we can actually help them to generate revenue and also direct even more traffic to them.

Thank you. Operator, next question, please.

Your next question comes from the line of [ph] Jin-Kyu Yoon from Mizuho Securities. Please ask your question.

Hey. Good evening, guys. Just a couple more questions on Moments. Can you just talk about what are the current ad loads on the Moments looking like right now? And what are the impending - or what are the remaining impediments that kind of pushing forward with more Moments ads? And the follow-up question is to your prior statement that you said that on WeChat Moments or on SMS advertising, you're targeting more localized advertisers. Is that advertiser acquisition going to be direct or indirect coming from agencies? And if so, what are the economics behind that? Thanks, guys.

In terms of the ad load right now, Moments, sort of when we first launch Moments, it was in a pilot launch mode. And then sort of over time, we continue to scale it. But in terms of the ad load, right now, we still put in a very stringent control. Right now, a user would not see more than one ad within 48 hours, right? So, when you compare it to a lot of the other apps, this is actually sort of very low ad load. The reason we are doing this is this is a very important user engagement scenario for us. We want to make sure that we can get the content right. We can get the technology right. We can sort of understand the user behavior in relation to advertising. And we want to invent certain mechanisms so that we can add the fund component and add the social component around advertising. So, there are a lot of basic things as well as innovative things that we are testing on the Moments ads. And we want to make sure their quality is high so that users would like these ads actually before we start to increase our ad load. So, that would take a process. We know that this is something that can be done over time, but we want to ensure the quality of execution along the way along the different dimensions I talked about. Now, in terms of the localized advertisers, for now, in terms of the big advertisers, we are leveraging our own sales force to do it, and we're working with four advertising agencies which is sort of the typical channel. We also have a self-serve channel which allows advertisers to upload their advertising. But that's sort of in our general inventory. But in terms of Moments right now, we are still in a pretty stringent mode which is there needs to be a pretty - heavily-engaged process in which the advertiser will work with agencies and then sort of come up with a high quality advertising and then we put it onto the Moment. Over time, we'll continue to find other agencies who can actually sort of help us to source advertisers and also create campaigns of better or high quality and that will proliferate.

Thank you. Operator, in the interest of time, we shall take the last three questions, please.

Thank you. Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your questions.

Thank you, management. I have two questions. First of all, eCommerce, the newly announced Jingdong plans, can management give us more color on the progress of your cooperation in terms of traffic directed to JD and conversion ratio that you can see from your statistics? And also, the payment from Tencent, does that also benefit JD? And then I have a follow-up question.

Okay. Well, the cooperation with JD sort of has been progressing quite nicely, I would say overall. And that include generating transactions for JD within our ecosystem, within our Weixin and Mobile QQ apps in terms of sort of new transaction on a daily basis that has been sort of growing on a consistent basis. At the same time, we also find that our apps are great sources for JD to reach new consumers. So, as you know, in JD's brand and [indiscernible] actually very strong in a lot of first-tier cities, but sort of [indiscernible] gets into sort of the second tier, third tier and fourth-tier cities, there are still users who have not really sort of get exposed into the service. But through our app, a lot of these new users would put in their first order and once they discover that the user experience is great, the product is actually authentic and quality is high, fulfillment is great, then they may repeat purchase within Weixin or Mobile QQ. And at the same time, they may just download an app and start buying through the JD app. So, from a new user acquisition perspective, we actually sort of contribute quite a large proportion of the new users to JD, especially on the mobile side. Now the new - well, in addition to that, we also talked about the cooperation around ad networks, right? A lot of our traffic is actually directed to JD's advertising system for them to present these inventories to their merchants and that actually sort of is a good way for them to bring more traffic to their merchants. The recent Jingdong plan is really for us to create more CRM and more marketing opportunities for high-quality brands that sell on JD, and that would include advertising inventories that would include a better promotion of the official accounts, and that would also include some specific entry points for some of these good brands. So, overall, I think sort of the relationship as well as the performance of our cooperation is actually progressing well as well as going from strength to strength.

Thank you, Martin. My follow-up question is in the area of mobile game. Mobile game has shown very strong growth this quarter compared with last quarter. I know some of that is related to product launch delay in the second quarter. Is there something else that has driven the rebound? Is it related to the overall industry or an uptake in the more sophisticated hardcore games? Thank you. I think the major change is change in strategy. We had a mobile game strategy that we were executing from late 2013 until early 2015. We recognize that as the mobile game industry matured and segmented, it was time to adjust our strategy. We came up with the new strategy during the second quarter, during which time we actually delayed several key new title launches while we were preparing the new strategy. And then we began to implement the new strategy in the third quarter. And I think that internal change was the primary dynamic.

Thank you. Next question, please.

Thank you. Your next question comes from the line of Alicia Yap from Barclays. Please ask your questions.

Hi. Good evening, everyone. Thanks for taking my questions. I have a couple of questions. Number one is that could you actually give us a little bit more detail how is official account advertising is progressing? And how is that- for example, now, this quarter versus three or six months ago. And then second, I have broader questions on the video industry landscape. So will video - to be a winner-takes-all, or the landscape will remain to have multiple players? Related to that, it seems like all the major online video platform are trying to own or secure as many differentiated content as possible to attract users. And with the takeoff of the video subscription service, what is the management's view regarding the consumer behavior over time on the subscription side? Will one platform stand out to win more user, or do you think that user could potentially subscribe to multiple video sites? And then the attractive content will still be a swing factor? And then lastly just related to that, is that when should we expect Tencent video to return profitable? Thank you.

So in terms of the official accounts, I believed we launched advertising in the official accounts in the third quarter last year. It's actually a very powerful advertising medium. I think more powerful that many people in the financial community recognize. And that's first because there's a gigantic volume of page views in the official accounts each day. We're talking in the billions of impressions. And secondly because advertising within the official accounts can use [indiscernible] targeting technologies. One based on the social profile of the Weixin or now the QQ user which we know is very powerful from the ads we have in Qzone and Moments and so forth. And then secondly, based on the content of the Official Account itself. So, we're actually seeing very good growth in Official Accounts. We mentioned the inventory tripled year-on-year, good growth in C2C, very high click-through rates, and we're quite optimistic about the future. One change we have made is that in the past, we had a flat fee or a flat rate revenue share with the Official Account content creators. Now, we actually channel a bigger proportion of the revenue to those Official Account owners to create original content into their Official Account first and then [indiscernible] share to those who simply repurpose Web-based content into the Official Account, and that's having the desired impact to driving more original content creation both text, image and now video within the Official Accounts. So, that's the Official Accounts. On the online video side of the business, I think you touched on an interesting issue which is that all else equal an advertising-funded video, while it is more likely to be fragmented between multiple channels, whereas a subscription-funded video while it tends to consolidate a little bit more because it's easier for the consumer to change channels than it is for them to cancel one subscription account and subscribe to a new subscription account. So, all else equal, while I think that both formats, ad funded and subscription funded are super competitive today will remain super competitive in the future. At the margin, the subscription-funded business will probably be a little bit more consolidated and the ad-funded business will probably remain more fragmented. In terms of user behavior, I think that - I mean, I can give you a mix of quantifiables and qualitative factors. On the quantitative side, what's interesting is that the habit of watching subscription video is something that's truly nationwide. It's still relatively concentrated in terms of age group and the type of content people pay for which is top tier local drama series, western drama series, western movies and western sports. But again, it's a habit that evolves nationwide. In terms of qualitative, if you look at the comments people put onto the subscription [indiscernible] comment, a year ago, it was all about how can I watch this for free, which other sites have this for free? Now people have largely kind of grown through that and they're much more inclined to actually discuss the merits or drawbacks of the content itself, which is an encouraging signal. I think it reflects the fact that the willingness to subscribe or the willingness to pay in order to watch high quality video content is increasingly embedded. And that's something that's benefited the whole industry. So, our own subscription revenue, video revenue is up about 800% year-on-year. But I think that's off the low base than many of our peers are seeing similarly rapid year-on-year revenue growth rates for subscription video service. In terms of bringing the video business in aggregate profitability, that's not a near-term target for us. Right now, what we're seeing is that as we spend more money on content, we attract more users which generates more revenue and enhances our platform quality. And so, we continue to reinvest in content rather than focusing on near-term profitability.

I just want to add sort of - we don't look at the video platform sort of new - in isolation. We believe that the video platform is actually a very important part of our overall traffic ecosystem. And as we look at - as an engagement tool, and that just generates a very engaging time - amount of time with the users. And at the same time, when you look at our overall IP strategy which is sort of will get us into the literature which sort of help us to monetize through the content as well as games. We believe a lot of these different platforms actually sort of will work together, and the overall profitability, right, of the entire ecosystem will be bigger than the individual platforms on an aggregate basis. So, I think that's the strategic importance of our overall media platform.

Thank you, Martin. We will take the last question, please.

Great. Thanks.

Thank you. The last question comes from the line of Thomas Chong from Citigroup. Please ask your questions.

Hi. Thanks, management, for taking my questions. I have two questions. The first question is about how we should think about the competitive landscape of the mobile games market next year because we see Tencent and yet you're already consolidating the market. And for the CrossFire and CMS for the mobile games, should we expect these two to be a blockbuster? Is there any color on that front? And my second question is about margin trend. The management talks about how we should think about the margin trend going forward. Should we expect it to be year-on-year increase, stable? Any color would be great. Thank you.

I think that in terms of the mobile game market, you're correct to observe that [indiscernible] and Tencent of taking some share of the mobile game market this year and more importantly have enjoyed some sort of stability in terms of both of us having multiple gains within the top 10 games by revenue month in, month out. I think that that's the sort of trend that we're seeing globally in terms of the - some of the bigger, more established mobile game developers in the United States and Europe and Japan and Korea enjoying enhanced market share and more importantly greater revenue stability from their mobile games. And I think it reflects structural changes in how easily consumers can discover new mobile games, the ability to update and enhance the player experience within the big existing mobile games and so forth. So, that's something that's generally worked to the benefit of the stronger mobile game developers and publishers in the industry. With regard to specific new mobile games, we were obviously optimistic. Otherwise, we wouldn't be –publish the titles. But time will tell how successful they become. I think in terms of margins, we generally don't give margin guidance. You should be aware that in the third quarter, we're still lacking the change in our [indiscernible] from net to gross. And that effect will drop out of the year-on-year comparisons going forward. And looking forward, we'll continue to bear some costs related to the growth of our payment business. We'll continue to bear some costs related to the growth of our video business. In the third quarter, you saw some impact on our Internet VAS gross margins because some of our newer mobile games a, have a revenue share to the third party developer; and b, for various reasons skew more toward iOS than Android. And to the extent that our future mobile games relative to third party and also skew more toward iOS than Android, that would have some impact on margins. But it's not something that particularly bothers us given the incremental margin on those third-party iOS skew in mobile games. It's still a very healthy incremental margin relative to our overall corporate operating margin, even if it's not as good as the first [indiscernible] game that's largely on Android. So, those are just some of the things to think about when you're thinking about our margins.

Thanks.

Okay. Thank you very much, operator. We are rounding up the call now. If you wish to check our press release and other financial information, please visit our corporate website at www.tencent.com/ir. We'll post a replay of this webcast on the site shortly. Thank you and see you next quarter.

Thank you. That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2015 third quarter results announcement conference call. You may all disconnect now.